A Surprise Lift From China for U.S. Steel
China has crushed U.S. steel producers, now the industry might get a boost from its long-time rival
By Nathaniel Taplin
U.S. Steel producers are poised to get a surprising boost from China, the same place that caused the industry more than a decade worth of pain.
While the focus has been on rising Sino-U. S. trade and geopolitical tensions, China has been quietly chipping away at one of the main sources of friction: massive overcapacity in its domestic steel industry, which has tanked global prices and helped gut overseas producers.
Beleaguered U.S. Steel, with its volatile shares and heavy debt burden, is a risky but potentially rewarding bet on a rebound for global steel producers. Investors have pushed shares down nearly 24% year to date, despite the company posting its best margin since 2008 in the second quarter. U.S. Steel’s profitable European operations are poised to benefit further from the same forces lifting Chinese margins: steel prices at multiyear highs paired with low prices for imported iron ore. The company’s flagship U.S. business, would get a further boost from any movement on Trump’s infrastructure or trade agenda.
MIND THE GAP
Index, June 2012 = 100
As with everything in the steel industry, the driving force is China. Since commodities bottomed in early 2016, steel prices have risen to nearly where they were at the tail-end of China’s last big stimulus in 2011, but iron ore prices are less than half 2011 levels of around $180 a ton.
The reason is that iron ore producers ramped up supply to serve what they believe was an insatiable Chinese appetite. Now, stocks at Chinese ports are near record highs—but the nation’s net steel product exports are down over 30% from last year, due to a combination of furnace closures and buoyant construction.
ROLE REVERSAL
Net Chinese Steel Products (metric tons)
U.S. Steel’s European unit is poised to benefit from this same dynamic. If lower iron ore costs push third quarter earnings per ton back near the postcrisis highs touched in the first-quarter, that alone would raise earnings before interest, taxes, depreciation and amortization for U.S. Steel by about 10%. That assumes actual steel shipments don’t get a boost from surprisingly strong European growth.
The company has reduced net debt by 40% since March 2016, when net debt to equity hit a high of 124% during the dark days of the commodity bust. U.S. Steel is now valued in line with competitors like Nucor and Steel Dynamics at 12 times forward earnings.
The main risk for steel right now is that the Chinese real-estate sector, the biggest source of global steel demand, cools abruptly. Plans to shutter more mills China this winter during the peak pollution season, could offset some of that. A longer term risk is a broad slowdown in the Chinese economy, likely sometime in 2018.
The global steel industry is in the best shape in years and U.S. Steel, while still risky, is well positioned to ride the good times.
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